Should You Pay Discount Points?

Mortgage AdviceThe low mortgage interest rates that you find online or in the newspaper aren’t necessarily what you’ll pay when you apply for a loan. Why? Because banks will charge you “discount” points to get the best rate, which adds to the cost of the loan.

Points, or discount points, are expressed as a percentage of the loan amount. The point "discounts" the interest rate, that's why it's referred to as a discount point. If your mortgage is $300,000, then one "point" is $3,000. For each point you pay, your interest rate should be reduced by about ¼ percent.

On a 30-year mortgage loan at $300,000 and 5.00%, the monthly payment works to $1,610 without any points.Paying one point ($3,000) would reduce the rate to 4.75%, making your discounted payment $1,564 per month.

That's a reduction of $46.00 per month. Now weigh the cost of $3,000. To get that, divide $46 into $3000. The result is 65. It will take you 65 payments to break even, nearly 5 ½ years. It’s worth it if you’re planning to stay in your home for 5 to 10 years or longer. If not, you’re far better off using the $3,000 to pay down your loan principal or buying furniture for your home.

There’s another way to get the best mortgage interest rate – that’s to have the best credit scores possible. Those with near or perfect credit are considered low risk by banks. As always, consult your financial advisor for more information about home loans.

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